Editor's choice: Lendio business loans
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Even if you’ve been in business for a few years, have excellent credit and are turning a profit, your business still might struggle to qualify for a loan if it’s part of a high-risk industry. Traditional lenders like banks don’t want to take the chance that your business might fold before you can pay back your loan. While your options are limited, you still have a few to choose from.
Lenders generally consider industries high risk if they are more likely to fail. For example, industries like alcohol and gambling might be considered high risk because they’re subject to regulations that frequently change. However, other industries like restaurant and retail might be seen as risky because revenue isn’t always guaranteed.
Industries that are less profitable because of changes in technology, like newspapers, are often considered high risk as well.
Some common industries that are considered high risk include:
$5,000 to $5,000,000
Factor fee of 0.2% to 1.3% per week
530+ personal credit score, 3+ months in business, $100,000+ annual revenue
$30,000 to $5,000,000
4.75% to 7.00%
650+ personal credit score, US citizen or permanent resident, 2+ years in business, $50,000+ annual revenue, no outstanding tax liens, no bankruptcies or foreclosures in past 3 years, business in eligible industry
First American Merchant
Merchant cash advances
Varies by lender
Varies by lender, cannabis-friendly options
Business term loans
$250,000 to $3,000,000
Starting at 6.75%
680+ personal credit score, 2+ years in business
You might not be able to get a bank loan if you’re in a high-risk industry. But you aren’t totally without options. In fact, you might even be able to qualify for favorable rates if your business can back the loan with collateral, business assets or a personal guarantee. Otherwise, be prepared to pay.
Invoice factoring technically isn’t a loan but an advance on your business’s unpaid invoices from government agencies and other business clients. How does it work? You sell your business’s unpaid invoices at a discount to a factoring company, which pays a percentage of their value in advance. The factoring company then collects payments from your clients and gives your business the rest of the money, minus a fee.
Factoring is one of the easiest types of financing to qualify for, but it can be expensive. Your business might also be required to sign up for several months or years of factoring, which can make it difficult to qualify for other less-expensive types of financing in the future.
A merchant cash advance (MCA) is similar to factoring, but for customer-facing businesses like retailers or restaurants. It works by giving your business an advance on future sales, which you repay plus a fixed fee with a percentage of your daily bank deposits or credit card transactions.
Like factoring, an MCA is easy to qualify for, but also one of the most expensive types of business financing out there. It can make it hard for your business to grow and is best left for emergency situations.
Don’t qualify for factoring or an MCA? Some alternative lenders offer short-term loans that work a lot like an MCA, where your business pays a fixed fee instead of interest. Others offer something closer to your traditional term loan with smaller amounts, higher rates and 18 months or less to pay back the loan.
Short-term loans typically come with daily or weekly repayments and, like MCAs and invoice factoring, are expensive. But you usually don’t need collateral or good credit to qualify, and the turnaround time can be as fast as one day.
Vehicle and equipment loans had the highest rate of approval out of any type of financing, according to a 2017 Federal Reserve survey. These loans are secured by the item you’re purchasing, making them a viable option for businesses that might not qualify for an unsecured loan and don’t have enough assets to use as collateral.
Still, some lenders might have some industry restrictions, so check before you apply. You’ll likely have to make a down payment of 10% to 20%, and you run the risk of losing the item you bought if your business can’t pay back the loan.
Loans backed by the Small Business Administration (SBA) come with some of the best rates and are geared toward businesses that have struggled to get financing elsewhere. Not all industries are eligible for SBA loans, but several high-risk ones are. SBA loans go up to $5 million and can be used for a variety of purposes, from covering a large expense to buying real estate.
However, they’re one of the most difficult types of financing to qualify for. This is partly because the SBA looks at factors other lenders don’t even consider, like your criminal record. The application is long and involved, though you can hire services like SmartBiz to cut down on the paperwork. Be prepared for the long haul if your business applies for one of these loans.
Local banks, community development financial institutions (CDFIs) and online lenders have the highest approval rates, according to the Federal Reserve. If your business is in a high-risk industry, consider starting with these types of lenders. CDFIs and small banks are typically designed to serve their local communities and might be more forgiving than other lenders. Online lenders have less overhead costs and often charge higher rates, so they can afford to take on more risk.
Try to stay away from large banks and credit unions — both rejected nearly half of all business loan applicants in 2017.
Your business’s industry isn’t the only thing that can make it difficult to get a loan. Lenders often consider these factors when looking at your application.
The less time your business has been around, the more of a risk you pose to potential lenders. In fact, many lenders require businesses to be up and running for at least a year or two before they’re eligible for financing. Newer businesses might have more luck with online lenders, whereas startups should consider alternatives like personal loans or crowdfunding.
How much your business makes each month is also important when applying for a loan. Lenders like to see that your business consistently brings in enough money to afford loan repayments. Many won’t work with small businesses that make less than $10,000 a month or $100,000 a year.
Lenders often don’t want to work with businesses that are already juggling several different types of debt repayments — you might not be able to afford to take on more. If repaying your current debt load doesn’t leave much wiggle room, consider paying off those loans first before taking out another.
If your business spends more than it makes or has seasonal sales, you might also struggle to qualify for a business loan. Lenders often prefer to work with businesses that are predictable. Some also require businesses to be cashflow positive to be eligible for financing.
Your business credit score typically doesn’t hold as much weight as your personal credit score for two reasons. One, business credit scores aren’t as widely used as personal credit ratings. And two, many business lenders require a personal guarantee from business owners. This means you’re on the hook for paying back the loan if your business fails. If you don’t have good credit, your personal guarantee might not mean as much.
Looking to increase your odds of getting approved for financing? Follow these tips:
While your loan options are limited as a business in a high-risk industry, it’s not impossible to get financing. Backing your loan with collateral and working with local lenders could even help you score favorable rates and terms. But if you don’t have collateral or struggle to meet other lender requirements, it can get expensive.
Curious about other types of business financing? Read our guide to business loans to learn how it all works and compare lenders.
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